Market sentiment firmed up on Wednesday on hopes that the European Central Bank will increase its effort to address the sovereign debt crisis, but the rise in risk-taking behavior may be short-lived as the heightening threat for contagion drags on investor confidence.

The Euro advanced to a fresh weekly high of 1.3156 as European Central Bank board member Benoit Coeure floated the idea of resuming the bond purchase program, but the single currency remains vulnerable to further shocks as the sovereign debt crisis continues to dampen the fundamental outlook for the region. Indeed, Germany sold EUR 4.11B in 10-Year bonds versus the EUR 5.0B target, while Italy offered 2.84% on its 361-Day bill, which compares to the 1.405% yield at the March 13 auction.

As European policy makers struggle to address the ongoing turmoil in the financial system, we should see the ECB continue to carry out its easing cycle throughout 2012, and it seems as though the Governing Council will revert back to its bond purchase program as the Long Term Refinancing Operations appear to be having a limited impact on the real economy. However, we may see ECB President Mario Draghi target the benchmark interest rate as the ballooning balance sheet comes under scrutiny, and we will maintain our bearish forecast for the EURUSD as the fundamental outlook for the region turns increasingly bleak. As the euro-dollar maintains the narrow range carried over from the previous week, the pair may continue to track sideways over the remainder of the week, but we anticipate to see fresh monthly lows in the exchange rate as it carves out a lower top coming into April.

British Pound: Upward Trend Continues To Take Shape Ahead Of Key Event Risks

The British Pound advanced to an overnight high of 1.5936 as market participants increased their appetite for risk, and the GBPUSD may continue to retrace the decline from earlier this month as it maintains the upward trending channel from the beginning of the year. As the GBPUSD carves out a higher low around 1.5800, we are looking for fresh yearly highs in the exchange rate, but the pair may consolidate over the remainder of the week as the economic docket is expected to reinforce a weakened outlook for the U.K. As market participants see the trade deficit widening to GBP 7.650B in February, the larger gap could dampen expectations for a more robust recovery, and we may see the pound-dollar consolidate going into the following week as the Bank of England is scheduled to release the meeting minutes on April 18. Should the BoE continue to soften its dovish tone for monetary policy, the fresh batch of central bank rhetoric could spark another bullish run in the GBPUSD, and we will maintain our bullish call for the sterling as the Monetary Policy Committee looks to conclude its easing cycle in 2012.

U.S. Dollar: Fed Rhetoric, Beige Book To Provide Support

The greenback lost ground on Wednesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR)tagging a fresh weekly low of 9,949, and the reserve currency may trade heavy throughout the North American trade as the rise in risk appetite appears to be gathering pace. As equity futures foreshadow a higher open for the U.S. market, the rebound in risk-taking behavior may continue to sap demands for the dollar, but the fresh batch of central bank rhetoric may help to prop up the greenback as Fed officials take note of the more robust recovery. At the same time, the Fed’s Beige Book may spark a bullish reaction in the reserve currency should the survey encourage an improved outlook for the world’s largest economy, and we should see the USDOLLAR track higher over the near-term as it maintains the upward trend from earlier this year.